The 5 Best Investments of the Past Decade

April 14th, 2011

The 5 Best Investments of the Past Decade

In investing, assets that have performed well in the past have a good chance of continuing to do well in the future. This is especially true when the factors that have driven the outperformance remain in place to drive the future performance.

Investment research firm Lipper recently released data detailing the best investments of the past decade. Below is an overview of the top five performers of the past 10 years. As you will see, a couple of recurring factors have driven the stellar results, so I expect them to continue to do so for many more years for a number of these top performers.

1. Precious metals
Annual gains in the past decade: 25.4%

Precious metals such as gold and silver were used in the past as currencies, but these days they qualify primarily as an alternative asset under the commodity asset class. In addition to gold and silver, this category also consists of metals such as platinum, palladium and diamonds. This investment class collectively had its best decade in more than 30 years, as demand for metals increased for both commercial purposes and investment appeal.

India and China accounted an estimated 51% of the demand for gold in 2010. This stemmed from growing popularity in those countries for jewelry and its overall investment appeal, given it is seen as a store of value, which can be especially important when inflation is high. These same drivers have influenced demand for other precious metals as well. Uncertainty in the developed world also drove the store of value consideration during the tumultuous period between 2007 and 2009, and the rally continued into 2011 with gold and silver having risen sharply — gold is up close to 30% while silver has jumped a remarkable 120% so far this year.

Commodities, Uncategorized

Open Source Finally Wins

April 14th, 2011

In yesterday’s essay “SMS: Nvst B4 It’s 2 L8” in The Daily Reckoning, I asserted, “There is going to be a rapid acceleration in the adoption of smartphones very soon. This is because the Android operating system has basically won the technological battle of the bands. It will become the standard. Microsoft has been beaten in the mobile space and its proprietary operating system is fading fast. Nokia has made a series of blunders as well and is now losing the mobile operating system space it once seemed destined to own forever.”

Today, I’ll tell part of what this development might mean for investors.

I lived and worked in Silicon Valley, mostly doing public policy research, but occasionally consulting for software companies. I was able to rub shoulders, at least, with most of the historic names. Bill Gates wasn’t one of them, however. As you probably know, he relocated to Redmond, Wash. He may have done so in part because he was so universally loathed in the Valley.

I have no window into the business culture that created the management philosophy of Microsoft. Regardless, it was Microsoft’s unrelentingly hardball business practices and skillful utilization of FUD – fear uncertainty and doubt – that energized the open source software movement. That movement is now at last on the verge of making the company largely irrelevant.

Developers who felt they had been treated unfairly or unethically by Microsoft often devoted enormous time, money and effort to create an alternate OS outside the control of Redmond. Sun Microsystems, a subsidiary of Oracle, gave more than a billion dollars to Linux developers. Linux, as you probably know, is an open source OS based on Unix, the OS developed first by AT&T employees at Bell Labs.

Current Linux operating systems are, in my opinion, superior to Windows. Nevertheless, I use the latest MS system because so many of the programs I need run only on Windows. I don’t, however, use MS Office, preferring Sun’s free OpenOffice. My wife, however, specialized in Oracle on Linux when she was helping look for Z bosons at the Stanford Linear Accelerator. To this day, she simply won’t use Windows, even if it makes some tasks more difficult.

She is, however, part of a minority. For the most part, Linux advocates failed to dent Microsoft’s’ OS dominance. This is not to say that the existence of a free alternative to Microsoft’s operating systems didn’t have a beneficial effect. I think the existence of a high-quality option to Windows has helped keep, to a certain degree, MS from completely controlling non-Apple software development. Apple, of course, completely dominates its software chain, which is why it accounts for so little of the market. Apple is a profitable company and makes great gadgets, but it’s unlikely they’ll ever have a bigger piece of the market than they now have.

There’s more to Linux, however, than Red Hat and GNOME. Linux programmers did succeed in denying Microsoft control of the server market. For non-techies, servers are just computers that do things other than interface as personal computers. They “serve” other uses, frequently “serving” processes and data on demand. Linux-based server software, especially Apache, have long dominated the server market. Apache, by the way, started out as a very “patchy” program. Linux-based software has also prevailed in the realm of supercomputers and research clusters used by many of the biotech companies in our portfolio.

While some economists say that Microsoft has been good for computing and America, I think that its negative impact on third-party developers may be greater. If you want to sell a product that runs on the Microsoft OS but are not a chosen partner of the company, you’re going to be at a severe disadvantage. Those disadvantages don’t exist in the server world, because Linux standards are open, giving no one special privileges. This allows more and faster innovation, which is what I care about most.

The most important Linux product of all time, however, is just beginning to have its impact. That is the mobile operating system Android. Google bought the original developer Android Inc. in 2005 and pretty much gave it to the Open Handset Alliance. This was part of Google’s strategy to move computing into the cloud and beyond Microsoft’s control. I think they’ve succeeded in that but, ironically, they seem to have overlooked a critical consequence of that move.

In Q4 2010, the Android OS was the world’s best-selling smartphone platform, ending the 10-year rein of Nokia’s Symbian. Recent events have solidified this trend. Open source advocates may have lost the personal computer battles, but they’re set to win the mobile war. This opens the doors for third-party developers like they’ve never been open before. Most importantly, it does so just as mobile devices, including phones and pad computers, are gaining the power they need to supersede laptops.

The next generation of Android pad computers is simply going to rock.

Moreover, the OS is a major cost component of smartphones. Since the industry is settling on the open source Android standard, which costs basically nothing, this will shave as much as $150 off the price of a device. The equivalent of smartphones that now sell for $200 will cost $50, or they will be given away free in place of the old feature phones.

Naturally, many third-party developers are going to exploit the killer app, SMS text. SMS will be the cheapest and fastest way to access increasingly complex cloud-based applications. These cloud-based applications will be accessed via the mobile device but the processing will be performed in the distributed network, the cloud. Even now MMS, Multimedia Messaging Service, abilities are being added to SMS. These include pictures, audio and video files, all the stuff that you now access via the Web. In short, SMS will be nearly indistinguishable from the Web, but cheaper and probably faster.

So here’s my extra-credit question. Who’s going to control the SMS/MMS search engine on your next smartphone or tablet computer?

I think I know, and I’ve shared my thoughts with the subscribers of Breakthrough Technology Alert. Whether I’m right or wrong, the answer to that question is worth a great deal of money…perhaps a small fortune.

Regards,

Patrick Cox
for The Daily Reckoning

Open Source Finally Wins originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Open Source Finally Wins




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Open Source Finally Wins

April 14th, 2011

In yesterday’s essay “SMS: Nvst B4 It’s 2 L8” in The Daily Reckoning, I asserted, “There is going to be a rapid acceleration in the adoption of smartphones very soon. This is because the Android operating system has basically won the technological battle of the bands. It will become the standard. Microsoft has been beaten in the mobile space and its proprietary operating system is fading fast. Nokia has made a series of blunders as well and is now losing the mobile operating system space it once seemed destined to own forever.”

Today, I’ll tell part of what this development might mean for investors.

I lived and worked in Silicon Valley, mostly doing public policy research, but occasionally consulting for software companies. I was able to rub shoulders, at least, with most of the historic names. Bill Gates wasn’t one of them, however. As you probably know, he relocated to Redmond, Wash. He may have done so in part because he was so universally loathed in the Valley.

I have no window into the business culture that created the management philosophy of Microsoft. Regardless, it was Microsoft’s unrelentingly hardball business practices and skillful utilization of FUD – fear uncertainty and doubt – that energized the open source software movement. That movement is now at last on the verge of making the company largely irrelevant.

Developers who felt they had been treated unfairly or unethically by Microsoft often devoted enormous time, money and effort to create an alternate OS outside the control of Redmond. Sun Microsystems, a subsidiary of Oracle, gave more than a billion dollars to Linux developers. Linux, as you probably know, is an open source OS based on Unix, the OS developed first by AT&T employees at Bell Labs.

Current Linux operating systems are, in my opinion, superior to Windows. Nevertheless, I use the latest MS system because so many of the programs I need run only on Windows. I don’t, however, use MS Office, preferring Sun’s free OpenOffice. My wife, however, specialized in Oracle on Linux when she was helping look for Z bosons at the Stanford Linear Accelerator. To this day, she simply won’t use Windows, even if it makes some tasks more difficult.

She is, however, part of a minority. For the most part, Linux advocates failed to dent Microsoft’s’ OS dominance. This is not to say that the existence of a free alternative to Microsoft’s operating systems didn’t have a beneficial effect. I think the existence of a high-quality option to Windows has helped keep, to a certain degree, MS from completely controlling non-Apple software development. Apple, of course, completely dominates its software chain, which is why it accounts for so little of the market. Apple is a profitable company and makes great gadgets, but it’s unlikely they’ll ever have a bigger piece of the market than they now have.

There’s more to Linux, however, than Red Hat and GNOME. Linux programmers did succeed in denying Microsoft control of the server market. For non-techies, servers are just computers that do things other than interface as personal computers. They “serve” other uses, frequently “serving” processes and data on demand. Linux-based server software, especially Apache, have long dominated the server market. Apache, by the way, started out as a very “patchy” program. Linux-based software has also prevailed in the realm of supercomputers and research clusters used by many of the biotech companies in our portfolio.

While some economists say that Microsoft has been good for computing and America, I think that its negative impact on third-party developers may be greater. If you want to sell a product that runs on the Microsoft OS but are not a chosen partner of the company, you’re going to be at a severe disadvantage. Those disadvantages don’t exist in the server world, because Linux standards are open, giving no one special privileges. This allows more and faster innovation, which is what I care about most.

The most important Linux product of all time, however, is just beginning to have its impact. That is the mobile operating system Android. Google bought the original developer Android Inc. in 2005 and pretty much gave it to the Open Handset Alliance. This was part of Google’s strategy to move computing into the cloud and beyond Microsoft’s control. I think they’ve succeeded in that but, ironically, they seem to have overlooked a critical consequence of that move.

In Q4 2010, the Android OS was the world’s best-selling smartphone platform, ending the 10-year rein of Nokia’s Symbian. Recent events have solidified this trend. Open source advocates may have lost the personal computer battles, but they’re set to win the mobile war. This opens the doors for third-party developers like they’ve never been open before. Most importantly, it does so just as mobile devices, including phones and pad computers, are gaining the power they need to supersede laptops.

The next generation of Android pad computers is simply going to rock.

Moreover, the OS is a major cost component of smartphones. Since the industry is settling on the open source Android standard, which costs basically nothing, this will shave as much as $150 off the price of a device. The equivalent of smartphones that now sell for $200 will cost $50, or they will be given away free in place of the old feature phones.

Naturally, many third-party developers are going to exploit the killer app, SMS text. SMS will be the cheapest and fastest way to access increasingly complex cloud-based applications. These cloud-based applications will be accessed via the mobile device but the processing will be performed in the distributed network, the cloud. Even now MMS, Multimedia Messaging Service, abilities are being added to SMS. These include pictures, audio and video files, all the stuff that you now access via the Web. In short, SMS will be nearly indistinguishable from the Web, but cheaper and probably faster.

So here’s my extra-credit question. Who’s going to control the SMS/MMS search engine on your next smartphone or tablet computer?

I think I know, and I’ve shared my thoughts with the subscribers of Breakthrough Technology Alert. Whether I’m right or wrong, the answer to that question is worth a great deal of money…perhaps a small fortune.

Regards,

Patrick Cox
for The Daily Reckoning

Open Source Finally Wins originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Open Source Finally Wins




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Big Rounded Arc Playing Out on SP500 April 14

April 14th, 2011

There’s a large-scale (from the perspective of the intraday chart) “Rounded Reversal” or “Price Arc” pattern playing out in the stock market right now, which is one of my favorite patterns.

Let’s take a look at the current “arc” structure and note two levels of Fibonacci Retracements to watch as the Arc continues.

I’ve been tracing out this pattern each night in the Daily Member Reports and wanted to update you on this pattern and the current levels to watch.

First, “Rounded Reversals” or “Arc Trendline” structures are among my favorite price patterns to trade, as they tend to be easy to recognize in advance (note the massive negative momentum divergences at the resistance high at 1,340) and give a clear pathway forward providing the market “rolls over” and moves on the downside of the arc as expected.

If the market ‘breaks’ the arc, then you know the pattern failed – all you have to do is draw a rounded arc trendline (can be done by hand if you print out your chart) and note whether or not price continues to bounce down from the curved trendline, or whether it continues in the down direction.

So far, the pattern has been good for a 35 to 40 point move and now faces its first critical “Will it Continue?” challenge at the 1,300 level which is a triple confluence:

  • The 38.2% Fibonacci Retracement as drawn
  • “Round Number” at 1,300
  • Prior Price ’spike’ low from March 29

So now we play the famous intraday game:  “Will it Break or Will it Hold?” which gives intraday traders a bit of advantage over swing traders (or at least traders who watch price all day vs. those who watch end-of-day price levels).

By that, I mean intraday traders can look at the ‘internals’ or ‘guts’ of the market on the lower (including 5-min and 1-min) charts to see if there are any bullish reversal (divergences, etc) signals or bearish breadown signals (no divergences, increase in volume and momentum as price falls, etc).

That’s another story, though.

For now, watch price very closely at the 1,300 pivot level and if we see a firm breakdown there, our next “T2″ (target #2, as we just hit “T1″ today) Arc Pathway level is likely to be the 61.8% Fibonacci Retracement along with the March 23rd “spike” low at the 1,285 level.

A failure for buyers to hold support at 1,285 opens the door for a “Full Arc” or “Mirror Image Reversal” pattern down to 1,250.

Take a minute to browse a few other posts I’ve written about Rounded Reversals/Arcs:

Lesson in Trading Intraday Arc Trendline Breaks/Reversals

Gold Trapped Between Rounded Arc Support and Horizontal Resistance

Log-View of the Arc Trendlines on the US Market Indexes (April 2010 ahead of “Flash Crash”)

Updated Arc Patterns on the US Indexes (again, ahead of “Flash Crash”)

Sell-off in Crude Oil from Intraday Rounded Reversal (May 10, 2010)

TLT “Arcs” Down into Support

In summary, there’s two main ways to play Arc patterns on any timeframe:

1.  Play the Continuation of Price through the duration of the “Arc”

2.  Play a Reversal/Breakout through an Arc Trendline

Arcs aren’t as popular or well-known as Head and Shoulders or Flag patterns, but they certainly have their place in a trader’s growing arsenal of patterns.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Read more here:
Big Rounded Arc Playing Out on SP500 April 14

Uncategorized

Big Rounded Arc Playing Out on SP500 April 14

April 14th, 2011

There’s a large-scale (from the perspective of the intraday chart) “Rounded Reversal” or “Price Arc” pattern playing out in the stock market right now, which is one of my favorite patterns.

Let’s take a look at the current “arc” structure and note two levels of Fibonacci Retracements to watch as the Arc continues.

I’ve been tracing out this pattern each night in the Daily Member Reports and wanted to update you on this pattern and the current levels to watch.

First, “Rounded Reversals” or “Arc Trendline” structures are among my favorite price patterns to trade, as they tend to be easy to recognize in advance (note the massive negative momentum divergences at the resistance high at 1,340) and give a clear pathway forward providing the market “rolls over” and moves on the downside of the arc as expected.

If the market ‘breaks’ the arc, then you know the pattern failed – all you have to do is draw a rounded arc trendline (can be done by hand if you print out your chart) and note whether or not price continues to bounce down from the curved trendline, or whether it continues in the down direction.

So far, the pattern has been good for a 35 to 40 point move and now faces its first critical “Will it Continue?” challenge at the 1,300 level which is a triple confluence:

  • The 38.2% Fibonacci Retracement as drawn
  • “Round Number” at 1,300
  • Prior Price ’spike’ low from March 29

So now we play the famous intraday game:  “Will it Break or Will it Hold?” which gives intraday traders a bit of advantage over swing traders (or at least traders who watch price all day vs. those who watch end-of-day price levels).

By that, I mean intraday traders can look at the ‘internals’ or ‘guts’ of the market on the lower (including 5-min and 1-min) charts to see if there are any bullish reversal (divergences, etc) signals or bearish breadown signals (no divergences, increase in volume and momentum as price falls, etc).

That’s another story, though.

For now, watch price very closely at the 1,300 pivot level and if we see a firm breakdown there, our next “T2″ (target #2, as we just hit “T1″ today) Arc Pathway level is likely to be the 61.8% Fibonacci Retracement along with the March 23rd “spike” low at the 1,285 level.

A failure for buyers to hold support at 1,285 opens the door for a “Full Arc” or “Mirror Image Reversal” pattern down to 1,250.

Take a minute to browse a few other posts I’ve written about Rounded Reversals/Arcs:

Lesson in Trading Intraday Arc Trendline Breaks/Reversals

Gold Trapped Between Rounded Arc Support and Horizontal Resistance

Log-View of the Arc Trendlines on the US Market Indexes (April 2010 ahead of “Flash Crash”)

Updated Arc Patterns on the US Indexes (again, ahead of “Flash Crash”)

Sell-off in Crude Oil from Intraday Rounded Reversal (May 10, 2010)

TLT “Arcs” Down into Support

In summary, there’s two main ways to play Arc patterns on any timeframe:

1.  Play the Continuation of Price through the duration of the “Arc”

2.  Play a Reversal/Breakout through an Arc Trendline

Arcs aren’t as popular or well-known as Head and Shoulders or Flag patterns, but they certainly have their place in a trader’s growing arsenal of patterns.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Read more here:
Big Rounded Arc Playing Out on SP500 April 14

Uncategorized

BRICS Growing In Stature

April 14th, 2011

A couple of years ago, when we offered a BRIC MarketSafe CD… I would talk to groups of people, and warn them that the BRICs not only hold the reserves of the world, but have a large percentage of the world’s population, and they would love nothing more than to be looked at as the “leaders of the world”… OK… There’s a BRIC Conference going on, so let’s see what’s on their minds…

But first, let’s look at the markets – specifically those of currencies and metals… Well, that bias to sell dollars that I talked about yesterday didn’t last too long into the morning, and by noon, the currencies were weaker. Gold and silver remained bid, but not well bid, as they had been in the early morning. In the overnight markets, the currencies have been all over the place… The trading ranges have been blown out, and one minute you see the currencies rally, and the next you see them sell off… It’s been pretty amazing watching this since I arrived here and climbed into the saddle this morning.

And… We got to see the color of the president’s plan to cut the deficit… The president unveiled a framework Wednesday to reduce borrowing over the next 12 years by $4 trillion – a goal that falls short of targets set by his deficit commission and House Republicans – and called for a new congressional commission to help develop a plan to get there.

In his most ambitious effort to claim the mantle of deficit cutter, Obama proposed sharp new cuts to domestic and military spending, and an overhaul of the tax code that would raise fresh revenue. But he steered clear of fundamental changes to Medicare, Medicaid and Social Security – the primary drivers of future spending.

So… We get another “commission” to develop the plan.. What happened to the previous commission? Hey, as I shrug my shoulders, at least someone in Washington DC is looking at this ever exploding deficit, and thinking that something should be done about it… And the overhaul of the tax code? Oh brother! Did he really say that “we all have a secret desire to pay more taxes”? Can I answer that one? NOT!

In the case of the deficit, personally, I believe it needs to start at the annual budget… When you can tame that monster, then it will flow to the national deficit… But that’s just me thinking logically…because… If you don’t tame the monster at the budget level, you won’t make the necessary cuts on the national debt level… It’s that simple… Or at least that’s how I see it…

OK… Let’s get to the BRICs, and see what’s up with these wild and crazy guys!

Well… First of all, the BRIC countries (Brazil, Russia, India and China) have added a new member, and now they are the BRICS with a capital “S” representing South Africa… And they are pounding their chests with new data that shows that the BRICS’ combined economies will eclipse the US economy in 2014, and by 2016, they will be putting 100 miles of desert between their economies and that of the US ($21 trillion versus $18.8 trillion)… Of course those are projected numbers, so there could be some changes…

But nonetheless, these countries are the straws that stir the global growth drink… Their problem, though, is how they act as a group, when they have very different political systems and economies? But for now the BRICS are feeling strong, and making statements like: The BRICS want to put an end to the dominance of the Western economies… And “the BRICS oppose use of force in Libya.” This just shows me that they are feeling like they are strong enough now to direct things… I don’t think that the time is here…

The most important thing about the strength of the BRICS is that they will have a lot of pull in the future, to demand what currency is considered the reserve currency of the world… Think about that for a minute, folks… I don’t know about you, but it puts shivers down my spine!

OK… Let’s talk about something else besides BRICS! Let’s see… Oh! Here we go… You’re going to like this one, kids… European Central Bank (ECB) Board member Bini Smaghi was talking last night and said that further ECB rate hikes would depend on “the economy and inflation.” He went on to note that, in trade-weighted terms, the euro (EUR) is roughly in line with its level in 2005 and in real effective terms is still 10% below the level at that time. Personally, I think that we’re hearing central bank parlance from this ECB member that the euro doesn’t enter into the decision for rate moves.

That’s a good thing to know up front, because with the euro above 1.40 (currently 1.44), it’s above the ECB’s comfort level for the currency, but that did not enter into the discussion of the recent rate hike… I like knowing that, for when we get to June or July, and the ECB is greasing the tracks of another rate hike, if the euro is stronger than it is now, we don’t have to worry about that getting in the way!

And, there was an interesting thing that happened overnight in Asia… The Monetary Authority of Singapore (MAS) announced that they would re-center the currency band, and allow faster appreciation of the Singapore dollar (SGD), to help combat inflation. This was in reaction to the news that the Singapore economy grew at an annualized rate of +23.5%, more than double the forecasts for +11.4% growth! WOW! The Sing dollar rallied on the announcements.

For some time now, I’ve stated at this time and place, with the Chinese renminbi (CNY) still manipulated every day and traded on a non-deliverable forward, that I prefer the Sing dollar as a proxy for Chinese renminbi appreciation… These Asian countries will all keep their currencies going in the same direction, as they are all in competition for exports… And the MAS does something that most countries don’t have a clue about, and that is… Using the Sing dollar’s strength to help offset inflation.

I also saw a blurb go across the screens yesterday regarding Indian investors and silver… According to the FT, Indian investors, long known for their enthusiasm for gold, are switching to silver bullion, as they expect it to generate higher returns… I wonder if they read that in the Pfennig, or the NewsMax story that I appeared in, claiming that silver was the new gold? HA!

This morning, the US data cupboard will print March PPI, which is expected to continue to show increases in wholesale inflation… Yesterday, the data cupboard printed March retail sales, which were less than forecast at 0.4%, less autos they were 0.8%… A major contributor to the sales were gas receipts… Which is not a good thing for our economy, as we’re spending our disposable income on gas, which lasts about a week in the gas tank, and then is gone, used up… And all the other things that consumers would normally be spending their hard earned cash on, get passed by, because there’s nothing left for them…

Speaking of gas… Have you heard of the new “gas coupon”… You probably already have a few of them in your pocket, and didn’t realize that they were “gas coupons”… Look again, they have President Lincoln on the face… OOPS! Those are $5 bills! HA!

There will be some Fed Heads on the speaking circuit today… They are all hawks, so look for more talk about ending QE2 early… It’s not going to happen, but they can talk about it to make themselves feel good… Sort of like buying a HYBRID SUV… HA!

Then there was this… From The Telegraph, as quoted by Bill Bonner in his essay “Government Spending and the Path to Money Printing” in yesterday’s Daily Reckoning

The Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means household peacetime disposable income is at its lowest since 1921.

Rising food, clothing and energy prices mean the average British family will have £910 less to spend this year than they did in 2009.

The CEBR calculates that household disposable income will fall by 2pc this year, more than double last year’s fall of 0.8pc and the biggest drop since the savage 1919 to 1921 post-First World War recession.

It forecasts inflation will average 3.9pc in 2011, its highest since 1992, as January’s increase in VAT from 17.5pc to 20pc and the rising cost of oil and other commodities continue to drive up prices.

At the same time, salaries will rise just 1.9pc as unemployment remains high and the public sector makes cutbacks.

Geez, Louise… This is not getting any better is it?

To recap… The bias to sell dollars was taken off the table yesterday mid-morning. I think it’s more of a reaction to the fact that the currencies moved too far, too fast, and needed to retrace some steps… The president announced a plan to reduce the deficit by $4 trillion over 12 years… UGH! The BRIC countries added an “S” to make BRICS, with the “S” representing South Africa. The BRICS just concluded a meeting of the countries, and they are feeling their oats a bit, making statements about the West, etc. Indians are opting for silver this year, instead of gold, and the MAS will allow faster appreciation of the Singapore dollar after Singapore’s economy grew +23%!

Chuck Butler
for The Daily Reckoning

BRICS Growing In Stature originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
BRICS Growing In Stature




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

BRICS Growing In Stature

April 14th, 2011

A couple of years ago, when we offered a BRIC MarketSafe CD… I would talk to groups of people, and warn them that the BRICs not only hold the reserves of the world, but have a large percentage of the world’s population, and they would love nothing more than to be looked at as the “leaders of the world”… OK… There’s a BRIC Conference going on, so let’s see what’s on their minds…

But first, let’s look at the markets – specifically those of currencies and metals… Well, that bias to sell dollars that I talked about yesterday didn’t last too long into the morning, and by noon, the currencies were weaker. Gold and silver remained bid, but not well bid, as they had been in the early morning. In the overnight markets, the currencies have been all over the place… The trading ranges have been blown out, and one minute you see the currencies rally, and the next you see them sell off… It’s been pretty amazing watching this since I arrived here and climbed into the saddle this morning.

And… We got to see the color of the president’s plan to cut the deficit… The president unveiled a framework Wednesday to reduce borrowing over the next 12 years by $4 trillion – a goal that falls short of targets set by his deficit commission and House Republicans – and called for a new congressional commission to help develop a plan to get there.

In his most ambitious effort to claim the mantle of deficit cutter, Obama proposed sharp new cuts to domestic and military spending, and an overhaul of the tax code that would raise fresh revenue. But he steered clear of fundamental changes to Medicare, Medicaid and Social Security – the primary drivers of future spending.

So… We get another “commission” to develop the plan.. What happened to the previous commission? Hey, as I shrug my shoulders, at least someone in Washington DC is looking at this ever exploding deficit, and thinking that something should be done about it… And the overhaul of the tax code? Oh brother! Did he really say that “we all have a secret desire to pay more taxes”? Can I answer that one? NOT!

In the case of the deficit, personally, I believe it needs to start at the annual budget… When you can tame that monster, then it will flow to the national deficit… But that’s just me thinking logically…because… If you don’t tame the monster at the budget level, you won’t make the necessary cuts on the national debt level… It’s that simple… Or at least that’s how I see it…

OK… Let’s get to the BRICs, and see what’s up with these wild and crazy guys!

Well… First of all, the BRIC countries (Brazil, Russia, India and China) have added a new member, and now they are the BRICS with a capital “S” representing South Africa… And they are pounding their chests with new data that shows that the BRICS’ combined economies will eclipse the US economy in 2014, and by 2016, they will be putting 100 miles of desert between their economies and that of the US ($21 trillion versus $18.8 trillion)… Of course those are projected numbers, so there could be some changes…

But nonetheless, these countries are the straws that stir the global growth drink… Their problem, though, is how they act as a group, when they have very different political systems and economies? But for now the BRICS are feeling strong, and making statements like: The BRICS want to put an end to the dominance of the Western economies… And “the BRICS oppose use of force in Libya.” This just shows me that they are feeling like they are strong enough now to direct things… I don’t think that the time is here…

The most important thing about the strength of the BRICS is that they will have a lot of pull in the future, to demand what currency is considered the reserve currency of the world… Think about that for a minute, folks… I don’t know about you, but it puts shivers down my spine!

OK… Let’s talk about something else besides BRICS! Let’s see… Oh! Here we go… You’re going to like this one, kids… European Central Bank (ECB) Board member Bini Smaghi was talking last night and said that further ECB rate hikes would depend on “the economy and inflation.” He went on to note that, in trade-weighted terms, the euro (EUR) is roughly in line with its level in 2005 and in real effective terms is still 10% below the level at that time. Personally, I think that we’re hearing central bank parlance from this ECB member that the euro doesn’t enter into the decision for rate moves.

That’s a good thing to know up front, because with the euro above 1.40 (currently 1.44), it’s above the ECB’s comfort level for the currency, but that did not enter into the discussion of the recent rate hike… I like knowing that, for when we get to June or July, and the ECB is greasing the tracks of another rate hike, if the euro is stronger than it is now, we don’t have to worry about that getting in the way!

And, there was an interesting thing that happened overnight in Asia… The Monetary Authority of Singapore (MAS) announced that they would re-center the currency band, and allow faster appreciation of the Singapore dollar (SGD), to help combat inflation. This was in reaction to the news that the Singapore economy grew at an annualized rate of +23.5%, more than double the forecasts for +11.4% growth! WOW! The Sing dollar rallied on the announcements.

For some time now, I’ve stated at this time and place, with the Chinese renminbi (CNY) still manipulated every day and traded on a non-deliverable forward, that I prefer the Sing dollar as a proxy for Chinese renminbi appreciation… These Asian countries will all keep their currencies going in the same direction, as they are all in competition for exports… And the MAS does something that most countries don’t have a clue about, and that is… Using the Sing dollar’s strength to help offset inflation.

I also saw a blurb go across the screens yesterday regarding Indian investors and silver… According to the FT, Indian investors, long known for their enthusiasm for gold, are switching to silver bullion, as they expect it to generate higher returns… I wonder if they read that in the Pfennig, or the NewsMax story that I appeared in, claiming that silver was the new gold? HA!

This morning, the US data cupboard will print March PPI, which is expected to continue to show increases in wholesale inflation… Yesterday, the data cupboard printed March retail sales, which were less than forecast at 0.4%, less autos they were 0.8%… A major contributor to the sales were gas receipts… Which is not a good thing for our economy, as we’re spending our disposable income on gas, which lasts about a week in the gas tank, and then is gone, used up… And all the other things that consumers would normally be spending their hard earned cash on, get passed by, because there’s nothing left for them…

Speaking of gas… Have you heard of the new “gas coupon”… You probably already have a few of them in your pocket, and didn’t realize that they were “gas coupons”… Look again, they have President Lincoln on the face… OOPS! Those are $5 bills! HA!

There will be some Fed Heads on the speaking circuit today… They are all hawks, so look for more talk about ending QE2 early… It’s not going to happen, but they can talk about it to make themselves feel good… Sort of like buying a HYBRID SUV… HA!

Then there was this… From The Telegraph, as quoted by Bill Bonner in his essay “Government Spending and the Path to Money Printing” in yesterday’s Daily Reckoning

The Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means household peacetime disposable income is at its lowest since 1921.

Rising food, clothing and energy prices mean the average British family will have £910 less to spend this year than they did in 2009.

The CEBR calculates that household disposable income will fall by 2pc this year, more than double last year’s fall of 0.8pc and the biggest drop since the savage 1919 to 1921 post-First World War recession.

It forecasts inflation will average 3.9pc in 2011, its highest since 1992, as January’s increase in VAT from 17.5pc to 20pc and the rising cost of oil and other commodities continue to drive up prices.

At the same time, salaries will rise just 1.9pc as unemployment remains high and the public sector makes cutbacks.

Geez, Louise… This is not getting any better is it?

To recap… The bias to sell dollars was taken off the table yesterday mid-morning. I think it’s more of a reaction to the fact that the currencies moved too far, too fast, and needed to retrace some steps… The president announced a plan to reduce the deficit by $4 trillion over 12 years… UGH! The BRIC countries added an “S” to make BRICS, with the “S” representing South Africa. The BRICS just concluded a meeting of the countries, and they are feeling their oats a bit, making statements about the West, etc. Indians are opting for silver this year, instead of gold, and the MAS will allow faster appreciation of the Singapore dollar after Singapore’s economy grew +23%!

Chuck Butler
for The Daily Reckoning

BRICS Growing In Stature originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
BRICS Growing In Stature




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

The Best Stocks to Own When Oil Hits $150 A Barrel

April 14th, 2011

The Best Stocks to Own When Oil Hits $150 A Barrel

In case you couldn't tell from the $4-a-gallon gasoline prices in your area, oil prices have been on the move. $80 per barrel, $90, $100… All have been sped past like interstate mile markers.

The chart below pretty much says it all.

As you can see, benchmark West Texas Intermediate Crude has been bubbling higher lately, with prices being now ascended into triple-digit territory. That's an impressive 200%-plus bounce off the lows from January 2009.

There are compelling reasons to believe these elevated prices might stick around for a while. In fact, further appreciation to the $150 level is a distinct possibility. That could act as an economic drag, siphoning money from consumers and sparking inflationary price hikes.

But on the other hand, $150-a-barrel oil can be a gale-force tailwind for energy investors. [Note: My colleague Andy Obermueller is with me in calling for higher prices. He recently discussed the situation in his article "Prediction: Oil Hits $200 and These 4 Things Happen."]

No margin for error
As you probably know, the sharp run-up in oil buying we've seen recently is in direct response to the geopolitical turmoil in Libya. According to the International Energy Agency, Libya is Africa's third-largest oil exporter. Deadly clashes have cut the nation's oil output by half, taking 850,000 barrels out of production per day.

And this is hardly an isolated trouble-spot in the unstable region. In fact, we've already seen vocal political protests break out in Bahrain, Oman and Tunisia. And Algeria, another key producer, even declared a state of emergency at one point.

Libya and other OPEC members in the Middle East and North Africa (MENA) produce 34 million barrels of oil a day and represent three-quarters of the world's reserves — so it's not surprising that escalating tensions in the region have rattled the markets and sent crude prices soaring.

I don't think we've seen the end of these uprisings just yet. But it doesn't take a violent coup in the Persian Gulf or tanker traffic threats in the Suez Canal to spook investors and lift prices at this point.

Even before these flare-ups, oil was climbing because of a simple leak in the Trans-Alaska Pipeline. Before that, it was a tropical storm in Mexico. The fact is, any disruption can unsettle the market because we simply don't have a drop of oil to spare.

The Unites States alone consumes about 20 million barrels of oil every day. China's appetite grows more ravenous by the minute, with daily consumption doubling from 5.5 million barrels in 2003 to nearly 10 million this year.

Aside from a brief downturn during the recession, global oil consumption is moving inexorably higher.

As you can see, worldwide oil consumption rose 2.4 million barrels a day in 2010 — the second steepest growth rate in 30 years. And it is projected to reach 88.2 million barrels per day this year. Meanwhile, the world's oil companies will only produce 87.7 million barrels a day.

In other words, demand will outstrip supply by 500,000 barrels per day.

As it stands, we can barely feed our appetite today. And we're getting hungrier. Per-capita consumption in China and India is still less than one-tenth that of the United States.

These growing middle-classes are catching up fast. In fact, 18 million new cars hit the road in China last year — about 50,000 a day — stretching supplies even thinner.

Uncategorized

The Best Stocks to Own When Oil Hits $150 A Barrel

April 14th, 2011

The Best Stocks to Own When Oil Hits $150 A Barrel

In case you couldn't tell from the $4-a-gallon gasoline prices in your area, oil prices have been on the move. $80 per barrel, $90, $100… All have been sped past like interstate mile markers.

The chart below pretty much says it all.

As you can see, benchmark West Texas Intermediate Crude has been bubbling higher lately, with prices being now ascended into triple-digit territory. That's an impressive 200%-plus bounce off the lows from January 2009.

There are compelling reasons to believe these elevated prices might stick around for a while. In fact, further appreciation to the $150 level is a distinct possibility. That could act as an economic drag, siphoning money from consumers and sparking inflationary price hikes.

But on the other hand, $150-a-barrel oil can be a gale-force tailwind for energy investors. [Note: My colleague Andy Obermueller is with me in calling for higher prices. He recently discussed the situation in his article "Prediction: Oil Hits $200 and These 4 Things Happen."]

No margin for error
As you probably know, the sharp run-up in oil buying we've seen recently is in direct response to the geopolitical turmoil in Libya. According to the International Energy Agency, Libya is Africa's third-largest oil exporter. Deadly clashes have cut the nation's oil output by half, taking 850,000 barrels out of production per day.

And this is hardly an isolated trouble-spot in the unstable region. In fact, we've already seen vocal political protests break out in Bahrain, Oman and Tunisia. And Algeria, another key producer, even declared a state of emergency at one point.

Libya and other OPEC members in the Middle East and North Africa (MENA) produce 34 million barrels of oil a day and represent three-quarters of the world's reserves — so it's not surprising that escalating tensions in the region have rattled the markets and sent crude prices soaring.

I don't think we've seen the end of these uprisings just yet. But it doesn't take a violent coup in the Persian Gulf or tanker traffic threats in the Suez Canal to spook investors and lift prices at this point.

Even before these flare-ups, oil was climbing because of a simple leak in the Trans-Alaska Pipeline. Before that, it was a tropical storm in Mexico. The fact is, any disruption can unsettle the market because we simply don't have a drop of oil to spare.

The Unites States alone consumes about 20 million barrels of oil every day. China's appetite grows more ravenous by the minute, with daily consumption doubling from 5.5 million barrels in 2003 to nearly 10 million this year.

Aside from a brief downturn during the recession, global oil consumption is moving inexorably higher.

As you can see, worldwide oil consumption rose 2.4 million barrels a day in 2010 — the second steepest growth rate in 30 years. And it is projected to reach 88.2 million barrels per day this year. Meanwhile, the world's oil companies will only produce 87.7 million barrels a day.

In other words, demand will outstrip supply by 500,000 barrels per day.

As it stands, we can barely feed our appetite today. And we're getting hungrier. Per-capita consumption in China and India is still less than one-tenth that of the United States.

These growing middle-classes are catching up fast. In fact, 18 million new cars hit the road in China last year — about 50,000 a day — stretching supplies even thinner.

Uncategorized

Gold and Silver Soars As U.S. Dollar Crumbles

April 14th, 2011

Gold broke out of its 6 month consolidation and cup and handle pattern. The gold bulls are now in control and short covering should begin to cause an explosive move to my late January target of $1600 on gold and $40 on silver. In late January, gold and silver were in a sell-off and many were predicting lower prices as moving averages were broken. Now we are on our way to the January target in gold of $1600. Many ask what to do as they sit on hefty gains. I have learned through many years of studying the markets that the use of measured moves and technical targets when making a selling decision is quite important and must be followed. Institutional investors sell into strength at overhead resistance and are able to take profits. At those times of extreme optimism is when one must get worried and take some risk off the table. For some people it may be going off margin, for others it may mean raising cash. At times when technical targets are reached, risk management becomes crucial as the most difficult time to sell is when the consensus turns positive. Please stay tuned to daily bulletins on when technical targets are reached.

What is interesting about last weekend’s breakout in gold is that it occurred simultaneously with China raising rates.

In November and December, when China was battling inflation and increased rates, sharp reversals and selloffs occurred in gold and silver to the downside. Now the exact opposite has happened. Excellent price action on negative news from China raising rates shows the yellow metal’s relative strength at this juncture. When precious metals rally and breakout on interest-rate increases that are supposed to slow down inflation, it’s a very bullish sign. This may signal that any rate hikes will not be enough to get inflation under control. Jesse Livermore teaches us that it is not the news item itself that should be monitored, but the market’s reaction to the event is most which is most important. Are we seeing the clues that precious metals are leaving for us? This breakout might cause a powerful 10% move to the upside and a powerful four to six week rally.

Although you may start getting excited with the major gains you’ll be seeing from the late January buy signal and all the Johnny come lately analysts buying gold during this euphoric breakout, I ask you to not get overly optimistic as technical targets will soon be reached in gold, silver, and my mining recommendations. Please reward yourself and take profits when technical targets will be reached. No one gets poor by taking profits.

Many investors have fled the yen (FXY) and are looking for alternative currencies to hedge their positions. The Japanese Earthquake may have many positive benefits to their local manufacturing. For months Japan was concerned about a rising currency and the falling US dollar (UUP) as this affected their exports. Japan was intervening in the foreign exchange markets, buying the US dollar to prevent devaluation. A weak US dollar and strong yen caused major concerns to Honda (HMC), Toyota (TM), and other export giants. This waterfall decline in the yen has not caused any rebound in the US dollar as investors have sold yen, buyinggold (GLD) and silver (SLV) instead. The weakness in the US dollar, a historical safe haven in times of uncertainty, is causing investors to reevaluate that status. This is definitely a catalyst for gold and silver.

The euro (FXE) is reaching technical resistance. Interest rate hikes in China and Europe will not derail this rally in precious metals as inflation is spiraling out of control. Investors are nervous about fiat currencies. Moody’s just downgraded Portugal and may consider further reductions in their bond ratings. If cuts are not made in the US and the debt ceiling is raised, we may see the US get downgraded. This will cause further weakness in the US dollar and rising bond yields. All this may be negative for the global equity markets and will be carefully monitored.

Although investors are celebrating new highs in equities and commodities on Wall Street, leaders in Washington are facing some serious decisions on how to balance the budget. The reckless spending in the government is forcing lawmakers to make some important resolutions about raising the debt ceiling and reducing entitlements. This uncertainty in the US Government combined with the Middle East Crisis escalating has caused investors to seek out the safety of silver and gold. Investors are seeking out the safety of precious metals as gold broke out of its cup and handle pattern and silver races towards my $40 target from late January.

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Read more here:
Gold and Silver Soars As U.S. Dollar Crumbles

Commodities

Gold and Silver Soars As U.S. Dollar Crumbles

April 14th, 2011

Gold broke out of its 6 month consolidation and cup and handle pattern. The gold bulls are now in control and short covering should begin to cause an explosive move to my late January target of $1600 on gold and $40 on silver. In late January, gold and silver were in a sell-off and many were predicting lower prices as moving averages were broken. Now we are on our way to the January target in gold of $1600. Many ask what to do as they sit on hefty gains. I have learned through many years of studying the markets that the use of measured moves and technical targets when making a selling decision is quite important and must be followed. Institutional investors sell into strength at overhead resistance and are able to take profits. At those times of extreme optimism is when one must get worried and take some risk off the table. For some people it may be going off margin, for others it may mean raising cash. At times when technical targets are reached, risk management becomes crucial as the most difficult time to sell is when the consensus turns positive. Please stay tuned to daily bulletins on when technical targets are reached.

What is interesting about last weekend’s breakout in gold is that it occurred simultaneously with China raising rates.

In November and December, when China was battling inflation and increased rates, sharp reversals and selloffs occurred in gold and silver to the downside. Now the exact opposite has happened. Excellent price action on negative news from China raising rates shows the yellow metal’s relative strength at this juncture. When precious metals rally and breakout on interest-rate increases that are supposed to slow down inflation, it’s a very bullish sign. This may signal that any rate hikes will not be enough to get inflation under control. Jesse Livermore teaches us that it is not the news item itself that should be monitored, but the market’s reaction to the event is most which is most important. Are we seeing the clues that precious metals are leaving for us? This breakout might cause a powerful 10% move to the upside and a powerful four to six week rally.

Although you may start getting excited with the major gains you’ll be seeing from the late January buy signal and all the Johnny come lately analysts buying gold during this euphoric breakout, I ask you to not get overly optimistic as technical targets will soon be reached in gold, silver, and my mining recommendations. Please reward yourself and take profits when technical targets will be reached. No one gets poor by taking profits.

Many investors have fled the yen (FXY) and are looking for alternative currencies to hedge their positions. The Japanese Earthquake may have many positive benefits to their local manufacturing. For months Japan was concerned about a rising currency and the falling US dollar (UUP) as this affected their exports. Japan was intervening in the foreign exchange markets, buying the US dollar to prevent devaluation. A weak US dollar and strong yen caused major concerns to Honda (HMC), Toyota (TM), and other export giants. This waterfall decline in the yen has not caused any rebound in the US dollar as investors have sold yen, buyinggold (GLD) and silver (SLV) instead. The weakness in the US dollar, a historical safe haven in times of uncertainty, is causing investors to reevaluate that status. This is definitely a catalyst for gold and silver.

The euro (FXE) is reaching technical resistance. Interest rate hikes in China and Europe will not derail this rally in precious metals as inflation is spiraling out of control. Investors are nervous about fiat currencies. Moody’s just downgraded Portugal and may consider further reductions in their bond ratings. If cuts are not made in the US and the debt ceiling is raised, we may see the US get downgraded. This will cause further weakness in the US dollar and rising bond yields. All this may be negative for the global equity markets and will be carefully monitored.

Although investors are celebrating new highs in equities and commodities on Wall Street, leaders in Washington are facing some serious decisions on how to balance the budget. The reckless spending in the government is forcing lawmakers to make some important resolutions about raising the debt ceiling and reducing entitlements. This uncertainty in the US Government combined with the Middle East Crisis escalating has caused investors to seek out the safety of silver and gold. Investors are seeking out the safety of precious metals as gold broke out of its cup and handle pattern and silver races towards my $40 target from late January.

Get my daily premium reports for a free month by clicking here.

Read more here:
Gold and Silver Soars As U.S. Dollar Crumbles

Commodities

Weiss Ratings Launches Watchdog Service with FREE Real-Time Alerts

April 14th, 2011

JUPITER, Florida (April 14, 2011) — Real-time alerts on changes in financial strength ratings and investment ratings can now be delivered free from the Weiss Watchdog, a new monitoring service from Weiss Ratings, the nation’s leading independent provider of bank, credit union and insurance company financial strength ratings.

Commodities, ETF, Mutual Fund, Uncategorized

Weiss Ratings Launches Watchdog Service with FREE Real-Time Alerts

April 14th, 2011

JUPITER, Florida (April 14, 2011) — Real-time alerts on changes in financial strength ratings and investment ratings can now be delivered free from the Weiss Watchdog, a new monitoring service from Weiss Ratings, the nation’s leading independent provider of bank, credit union and insurance company financial strength ratings.

Commodities, ETF, Mutual Fund, Uncategorized

Billionaire Investors Are Pouring Money into These Stocks

April 14th, 2011

Billionaire Investors Are Pouring Money into These Stocks

The technology industry saw a nice uptick in mergers and acquisitions activity in 2010. The total transaction amount doubled from the previous year to $107.1 billion, while the number of deals increased by 73% to 165, according to a recent report from PwC's Transaction Services group.

One of the hot areas for deals was semiconductors. From 2009 to 2010, M&A activity increased from $5.6 billion to $7.6 billion.

It looks like the momentum will continue. Already this year, Qualcomm (Nasdaq: QCOM) has agreed to purchase Atheros (Nasdaq: ATHR) for $3.1 billion and Texas Instruments (NYSE: TXN) has announced a $6.5 billion deal for National Semiconductor (NYSE: NSM).

Why should investors care?

Uncategorized

Your ETFs and the Tax Man

April 14th, 2011

Ron RowlandIf you haven’t filed your income tax return yet, “The Day” is almost here! Millions of Americans are sweating right now as they frantically sort out deductions, credits and amortizations.

Mutual funds have long been a sore spot at tax time. Investors sometimes wonder if the diversification and potential performance outweigh the extra hassle. They have a point. If you own a fund for a long time and have your dividends and distributions reinvested, you’d better keep good records.

Exchange traded funds can’t completely eliminate tax headaches. They do, however, make the load substantially lighter. Today I’ll explain how this works and try to answer a couple of common ETF tax questions.

First, I must remind you that I’m not a CPA, nor can I give personal tax advice. You should definitely consult a professional about your own situation. The discussion below just covers some general principles.

Sometimes tax preparation is best left to professionals.

Sometimes tax preparation is best left to professionals.

Someone Has to
Pay the Piper

The tax code is riddled with exemptions and special treatment for various groups. Generally, though, if you realize profits from your ETF in a calendar year, you will have to report it as income.

Suppose you bought an ETF at $10 a share in 2009, and sold it at $15 a share in 2010. You made a $5 per share profit. Congratulations! You also now have a “capital gain,” and the IRS will want its share.

Note that capital gains are taxed in the year the trade is “realized,” which may be different than the year you bought your ETF. This is one of the prime arguments in favor of long-term investing. You don’t have to pay tax on a gain until the gain is actually in your hands, right?

Right … sometimes.

Mutual funds are infamous for making “capital gains distributions” to shareholders — even those who still own the fund and have not otherwise “realized” any gains. They do this so the fund itself doesn’t have a tax liability, which makes some sense but also creates distortions. For example, buy a fund just before a distribution, and you can end up paying tax on gains made by other people.

Not fun at all.

The ETF structure largely solves this problem. Yes, ETFs can and do have capital gains distributions. They tend to be small and infrequent, though. Some ETFs go years without the need for a distribution.

As I said above, there are always exceptions to the rule. One common scenario is when you own an ETF or a mutual fund within an IRA, 401(k), or other retirement plan. Generally speaking, your tax liability will be deferred (though not eliminated) until you withdraw the profits.

K-1? What’s That?

Another exception has to do with ETFs that use futures and other derivative instruments to implement their strategies. This is the case in many commodity and currency-related ETFs. If you own any such products, you may get a mysterious form called a “Schedule K-1.”

For some reason, the K-1 form really frightens some people. They don’t know what to do with it and start to panic. As someone who has seen many K-1s, I can tell you there is no need to worry. It is really not so complicated.

The K-1 is not as frightening as some people think.

The K-1 is not as frightening as some people think.

Any investment classified as a “partnership” for tax purposes is required to give each investor a K-1 every year. They must deliver a form to you even if you received no income from it that year. This applies even for IRAs, 401(k)s, and retirement accounts.

The same is true for all kinds of partnerships: Small businesses that are “S” corporations, limited partnerships that own real estate or energy-related assets, and many more. K-1 forms are actually quite common. What’s important is the numbers, not the form itself.

Let me say it again: The mere fact that you receive a K-1 from an ETF does NOT mean you owe taxes on that ETF. You may have a tax liability — or you may not. You could even have a loss that offsets other kinds of income. Those kinds of K-1s aren’t so bad.

If you hold the ETF inside your IRA, the K-1 information is probably unnecessary from your perspective. The ETF sponsor would rather not have to send it to you. They don’t have a choice, unfortunately.

Commodity and Currency Funds

Most commodity and currency funds generate their returns by holding futures contracts. The IRS requires these funds to be “marked to market” at the end of each year, at which time any open gains or losses are apportioned to investors. This means the K-1 can show gains, even if you didn’t sell any shares.

Gold funds are another special case because the IRS taxes gold as a “collectable” instead of as an “investment.” So pay special attention to the forms you get on your gold holdings.

MLP ETFs and ETNs

Last week, my colleague Nilus Mattive, discussed some of the implications of K-1s in his column “Tax day tips for MLP investors.”

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized